How to Solve the Problem of Wasteful Health Care Spending

The amount of money the United States spends on health care is the highest of any other nation in the world. So why does it so often seem like we aren’t getting the full value of what we paid for?

A new study aims to help address this question by taking a closer look at the critical issue of wasteful health care spending. A joint effort from the non-partisan think tank American Health Policy Institute (AHPI) and the consulting service firm Value Based Insurance Design Health (VBID), the study analyzed the health care spending patterns of 35 large employers, all self-insured, that collectively provide health care to approximately 1 million employees at a cost of roughly $10 billion. Because these companies represent a diverse cross-section of large American employers, the combined results provide a helpful window into the spending habits and waste areas of a typical large employer health plan.

Where is wasteful spending happening?

By leveraging Big Data and sophisticated analytics tools, the AHPI/VBID study concluded that approximately 21% of total health care spending—for the 35 companies analyzed, that’s a sum of about $2 billion—could be considered wasteful or unnecessary. The study identified the following four categories as the major sources of this wasteful spending:

Pharmacy—Problems associated with prescription drugs account for 4% of health care spending. This is primarily due to errors and poor management, including the over-prescription of antibiotics, the misuse of drugs on the part of patients, excessive pricing from drug companies, and issues around fraud and abuse.

Inpatient—When medical treatments that can safely and effectively be performed in outpatient settings are instead performed in inpatient or hospital settings, wasteful spending is an almost inevitable consequence. The study estimates that 6% of health care spending results from such situations as preventable or avoidable hospital readmissions, hospital-acquired infections, and other systemic failures that lead to extended stays and further complications.

Outpatient and professional services—Outpatient issues, including poor or inappropriate treatment of chronic conditions like diabetes or asthma, unnecessary emergency room visits, and defensive medicine (where the treatment prescribed is not necessarily the best option for the patient, but rather the one that will best safeguard the provider against litigation), account for 9% of health care spending. The largest single source of wasteful spending, this category constitutes a leading candidate for health care spending reform.

Administration—It’s hardly surprising that the bureaucratic inefficiencies associated with health care spending can lead to wasteful expenditures. Health system critics may be more likely to be surprised by the fact that only 2% of spending falls into this category, primarily due to factors like inefficient claims processing, high staff turnover, ineffective use of IT, and overall operational complexity.

How can we solve the problem of wasteful spending?

Despite clear and extensive evidence that wasteful spending is a major health care problem, concrete strategies to effectively mitigate this waste are not easy to come by. The AHPI/VBID study aims to fill this gap by providing a number of practical recommendations about potential solutions, many of which are driven by data tools and new technologies. These include:

Informatics and data warehousing—It’s very difficult to change something if it hasn’t first been measured. The AHPI/VBID study identifies effective data analysis and reporting as one of the first key steps to take in identifying, quantifying, and reducing wasteful health care spending. Specialized software such as VBID’s own Health Waste Calculator (an analytical tool that uses a sophisticated set of algorithms to examine data from claims or electronic health records) can provide a much more detailed picture of micro-level spending and assess the impact of specific spending interventions.

Value-based payments—Payment reform is another vital strategy that can help reduce wasteful health care spending. The system is already moving in this direction as more and more payors make the shift from traditional fee-for-service payments to value-based payments, which holistically encompass entire episodes of care under one payment. Other measures to implement alongside this new approach include increased transparency and useful tools like reference pricing and bundled payments.

Predictive modeling and risk scoring—Catching costly health care problems before they become too serious can greatly reduce wasteful spending, not to mention diminish the overall strain on the health care system. The APHI/VBID study recommends that self-insured employers make use of predictive modeling tools to help identify high-risk employees (based on disease type and cost ranking) and take proactive case management steps when appropriate.

Administrative efficiency—Large employers are in an excellent position to turn their combined purchasing power and economies of scale to their advantage when it comes to combatting administrative inefficiencies. The development of shared services, group purchasing arrangements, best practices implementation, and other benefits of scale are all actions that large employers can take to optimize administrative processes and cut down on wasteful operational spending.